VZCZCXRO2816
RR RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHSA #2280/01 3130707
ZNR UUUUU ZZH
R 090707Z NOV 09
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 0145
INFO RUCPDC/DEPT OF COMMERCE WASHINGTON DC
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHZO/AFRICAN UNION COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 1041
RUEHNE/AMEMBASSY NEW DELHI 0641

UNCLAS SECTION 01 OF 03 PRETORIA 002280 
 
SENSITIVE BUT UNCLASSIFIED 
SIPDIS 
 
DEPT FOR EEB ALAN GIBBS 
STATE PASS TO USAID 
 
E.O. 12958: N/A 
TAGS: ECPS EIND EINV EINT ETTC EAID SOCI SF
SUBJECT: FOREIGN OPERATORS AND PRIVATIZATION INCREASE COMPETITION IN 
ICT SECTOR, SAG STILL FAVORS PARASTATALS 
 
REF: A. 09 STATE 2164 
     ¶B. 08 PRETORIA 1278 
     ¶C. 09 PRETORIA 249 
     ¶D. 09 PRETORIA 1033 
     ¶E. 09 PRETORIA 2194 
 
------- 
SUMMARY 
------- 
 
¶1. (SBU) Neotel executives briefed Ambassador Gips on the creation 
of the second fixed-line operator on October 27.  Neotel began 
operations in 2005 and is working with new undersea fiber-optic 
cable companies to boost broadband capacity in the region.  Neotel 
executives outlined impending changes in the South African 
Information and Communication Technology (ICT) regulatory 
environment under the Zuma administration.  The SAG will have to 
consider providing incentives to private operators to improve rural 
network coverage and service delivery.  Separately, Econoff attended 
Neotel's second Telecommunications Academy graduation on October 30. 
 Neotel hopes to expand the number of trainees it can accommodate at 
its academy and is pursuing partnerships to secure employment 
opportunities for its graduates.  The pace of liberalization in the 
ICT sector and the entry of new foreign operators and undersea cable 
projects has begun to improve ICT capacity in South Africa.  The 
propagation of parastatal entities under the Mbeki administration 
did not improve service quality or delivery, but industry analysts 
do not expect the SAG to abandon state champions such as Telkom or 
Broadband Infraco.  End Summary. 
 
------------------------- 
NEOTEL BRINGS COMPETITION 
TO TELKOM'S MONOPOLY 
------------------------- 
 
 
¶2. (SBU) Neotel Chief Technology Officer Dr. Angus Hays and Head of 
Regulatory Affairs Dr. Tracy Cohen briefed Ambassador Gips on the 
creation of the second fixed-line operator on October 27.  Neotel 
began operations in December 2005, after lengthy delays in South 
Africa's implementation of liberalization policies outlined in the 
Telecommunications Act of 1996.  Neotel's original shareholders 
included state-controlled power utility Eskom (15 percent) and 
state-controlled transport logistics group Transnet (15 percent). 
Neotel began building its network from Eskom and Transnet's existing 
fiber connections.  Dr. Angus Hay explained that Neotel is currently 
the only operator in the sector not to have direct SAG ownership. 
 
¶3. (SBU) In January 2009, the SAG approved the sale of existing 
Eskom and Transnet share's to Neotel's parent corporation, 
India-based Tata Communications.  This decision allowed Tata to gain 
a controlling share (56 percent) of Neotel.  According to Hays, Tata 
considers South Africa as its second home market after India.  Black 
Economic Empowerment (BEE) partners hold 19 percent of shares; some 
are well connected politically.  The remaining shares are held by 
private consortiums. 
 
¶4. (SBU) Neotel is expanding its network and has focused on building 
its business around larger commercial customers.  Neotel also has 
plans to bring fiber connections directly to consumers' homes. 
Neotel was a facilitator for the SEACOM undersea fiber-optic cable 
when other South African companies would not support a private cable 
project (Ref B).  Neotel worked with SEACOM to extend the fiber 
connection from the landing site in KwaZulu-Natal Province to the 
country's industrial hub in Gauteng Province.  Hays explained that 
the threat of piracy on the Gulf of Eden and some political 
interventions delayed the launch of SEACOM by a few months.  Hays 
Qinterventions delayed the launch of SEACOM by a few months.  Hays 
commented that it was politically expedient to blame piracy concerns 
for all of the delays.  The piracy threat has also affected the 
other pending undersea cable projects.  The projects have had to 
depend on patrol/escort support from the U.S. and French navies 
since the main suppliers are French-American company Alcatel-Lucent 
and U.S.-based Tyco Telecommunications. 
 
¶5. (SBU) Dr. Hays said Neotel's comparative advantage includes its 
ability to tap into Tata's existing global network, including the 
SAFE/SAT-3 satellite network.  Neotel is also promoting the 
development of other undersea cable projects including EASSY (East 
Africa) and WACS (West Africa), which are expected to further boost 
bandwidth capacity in Africa.  According to Hays, EASSY is expected 
to begin operations in mid 2010. 
 
¶6. (SBU) Neotel is also working with existing mobile operators MTN 
and Vodacom to boost network capacity around the major metro 
 
PRETORIA 00002280  002 OF 003 
 
 
centers.  They are collaborating to build 5,000 km of additional 
fiber capacity and there is some tower sharing among the three. 
Neotel has also considered acquiring mobile operator Cell C, but 
Hays indicated that the "debt on Cell C is too high to consider it 
viable unless there was a fire sale." 
 
------------------ 
LEADERSHIP CHANGES 
EXPECTED AT ICASA 
------------------ 
 
¶7. (SBU) Dr. Cohen, a former Independent Communications Authority of 
South Africa (ICASA) Councilor, explained that ICASA was developed 
with some USAID and Canadian Aid assistance.  Therefore, it is 
partially based on the U.S. Federal Communications Commission and 
Canadian regulatory models.  ICASA has approximately 300 staff 
including its regional divisions.  ICASA councilors serve staggered 
four-year terms.   ICASA's CEO is appointed for a five-year term. 
The Minister of Communications makes the appointment based on 
Parliamentary advice.  However, independence constraints and 
interventions from the Department of Communication (DOC) impeded 
ICASA's decision-making processes in the past (Ref C). 
 
 
¶8. (SBU) Neotel executives said ICASA's leadership structure would 
change drastically in the next year.  Last minute labor and ICASA 
interventions (Ref D) in the Vodaom-Telkom dissolution made ICASA 
look bad.  Major executive changes were expected to deal with the 
resulting public backlash.  Dr. Cohen said there is strong 
indication that the next ICASA CEO would not be a political 
appointee, but someone with technical expertise in the sector.  She 
expected this to offset the lack of technical expertise possessed by 
the current Minister of Communications General Siphiwe Nyanda.  In 
Cohen's view, the current ICASA CEO Paris Mashile, a political 
appointee, became difficult for the SAG to control. 
 
¶9. (SBU) Dr. Cohen welcomed U.S. technical assistance in the sector 
and said ICASA would benefit particularly from technical assistance 
on spectrum management.  She explained that the Parliamentary 
Portfolio Committee on Communications is extremely receptive to 
technical assistance and has been active in improving the 
legislative and regulatory climate.  She suggested that the USG 
should consider working with Parliamentary Portfolio Committee's 
Chairperson Ismail Vadi to promote liberalization and improve 
technical capacity in the sector. 
 
------------------------ 
POLICY BOTTLENECKS STILL 
THWART COMPETITION 
------------------------ 
 
¶10. (SBU) Dr. Cohen noted that the DOC is also trying to "claw back 
some power" from ICASA on regulatory issues.  In the past, ICASA has 
been criticized for pursuing lengthy market studies that have slowed 
down decision making on ICT regulatory issues.  In the current 
economic climate, Neotel executives expected less appetite for 
additional process-oriented decision-making.  Instead, they expected 
Ministerial edicts on issues such as rate determinations for 
interconnection and call-termination fees. 
 
¶11. (SBU) Neotel executives also emphasized that the SAG would 
continue to protect government-controlled entities such as Telkom, 
despite allowing foreign operators limited access into the sector in 
the last few years.  Telkom is the country's flagship ICT company 
and the DOC has direct influence over its CEO.  They cited continued 
SAG support for state-owned signal carrier Sentech as another 
QSAG support for state-owned signal carrier Sentech as another 
example.  Sentech was designed to be the SAG's wireless operator, 
and takes up a large share of scarce spectrum capacity (50 
megahertz) without producing much results.  General Nyanda wants to 
continue supporting Sentech because it reports directly to the DOC. 
Similarly, the parastatal company Broadband Infraco, created to 
develop undersea broadband cable capacity, was slated to be 
incorporated into the second fixed-line operator once Neotel was 
licensed.  However, that did not occur because of tensions between 
the DOC and the Department of Public Enterprises (DPE).  DPE has 
some oversight on parastatal entities (Ref A), and tensions continue 
to rise over control of Broadband Infraco. 
 
---------------- 
RURAL COVERAGE 
STILL INADEQUATE 
---------------- 
 
¶12. (SBU) Dr. Hays explained that South African operators have 
 
PRETORIA 00002280  003 OF 003 
 
 
traditionally focused their network development strategies on urban 
areas due to commercial viability issues.  The challenge for the SAG 
and operators is to extend network service to rural areas.  Dr. Hays 
noted the critical need to find a viable model to promote rural 
network rollouts, which are required to improve service delivery. 
He explained that the SAG has avoided the use of incentives, but 
emphasized that financial incentives are required to encourage 
network development in rural areas that would be unprofitable 
initially.  A SAG-controlled entity, the Universal Service and 
Access Agency (USAA), was launched in 2002 to address country-wide 
access constraints, but policy bottlenecks have rendered it 
ineffective (Ref A). 
 
¶13. (SBU) A digital dividend is expected from the impending digital 
migration.  Dr. Hays said 80-100 megahertz of spectrum would be 
freed up from the digital migration and could be put to good use to 
improve rural coverage if there is political will.  The SAG 
originally announced the digital migration process to be completed 
by November 2011, but Neotel executives thought that late 2012 was a 
more realistic timeframe.  The DOC recently released a new policy 
spectrum allocation, which Neotel executives described as weak on 
specifics. 
 
------------------------ 
NEOTEL ACADEMY ADDRESSES 
SKILLS SHORTAGE 
------------------------ 
 
¶14. (SBU) ICT Officer attended Neotel's second Telecommunications 
Academy graduation on October 30.  Neotel launched the academy in 
2007 with 10 students as a pilot program.  The full academy was 
launched in March 2008 with 27 students enrolled.  Neotel CEO Ajay 
Pandey described the initiative as an effort to "build a gene pool 
of local ICT expertise."  Neotel worked with the SAG's Information 
Systems, Electronics, and Telecommunication Technologies Sector 
Education Training Authority (ISETT-SETA) and international ICT 
companies such as U.S.-based Cisco to develop the curriculum for the 
academy and offer post-training employment opportunities.  Pandey 
and the Deputy Minister of Communications emphasized the need to 
build R&D capacity within South Africa.  The Neotel Academy was 
cited as a potential first step to encourage trainees to pursue 
additional graduate and post-graduate studies in this sector. 
Increasing PhD-level expertise within South Africa was cited as a 
requirement to remain globally competitive. 
 
¶15. (SBU) Neotel recruits trainees from historically underprivileged 
backgrounds, and the trainees receive stipends for living expenses 
during the program.  Seventeen trainees successfully completed the 
program this year.  The one-year training program builds on basic 
engineering qualifications.  This year's trainees spent time at 
Tata's operations in India to increase their global exposure.  Tata 
has also extended an offer to receive future trainees at its other 
global operations.  China-based Huawei has also offered employment 
opportunities to the graduates.  Pandey noted that he would pursue 
further corporate partnerships to secure employment opportunities 
for future graduates and also welcomes support from donor countries 
to expand the number of trainees it can accommodate. 
 
-------- 
COMMENTS 
-------- 
 
¶16. (SBU) The pace of liberalization in the ICT sector and the entry 
Q16. (SBU) The pace of liberalization in the ICT sector and the entry 
of new foreign operators and undersea cable projects has begun to 
improve ICT capacity in South Africa.  Broadband capacity and costs 
have improved in the last year, but are not yet meeting global 
standards.  Increased capacity in the sector will help SAG meet some 
of its commitments to FIFA for the 2010 World Cup and boost economic 
development as more medium and small businesses can begin launching 
e-commerce services.  Companies such as Neotel, Cisco, and Microsoft 
have developed programs and academies to improve local skills 
development, but these are still small-scale projects.  ICT network 
coverage in rural and historically disadvantaged areas also needs 
improvements.  The SAG will have to consider providing incentives to 
private operators to improve rural coverage and service delivery. 
The propagation of parastatal entities under the previous 
administration has not improved service quality or delivery in the 
sector, but industry analysts do not expect the SAG to abandon state 
champions such as Telkom or Broadband Infraco.  End Comment. 
 
Gips